Dollar falls on weak U.S. growth, debt fears

Buck retreats against yen, Swiss franc; rising yields undercut euro

DeborahLevine

SAN FRANCISCO (MarketWatch) — The dollar fell Friday toward its lowest level ever against the Japanese yen, hit an all-time low against the Swiss franc and weakened against the euro after data showed the U.S. economy expanded at a pace slower than expected in the second quarter.

China slams U.S. debt

(4:18)

A sharply worded commentary from China's state news agency highlighted rising concerns in America's biggest creditor nation over a possible default or downgrade of U.S. debt.

Meanwhile, the euro remained lower against most major currencies after Spain was put under review for a downgrade, heightening worries about Europe’s own debt crisis and its impact on the region’s shared currency.

The dollar index
DXY, +0.54%
which tracks the U.S. unit’s performance against a basket of six other currencies including the euro, fell to 73.846, off from 74.210 late Thursday. The index trades around 0.5% lower for the week, down 0.6% on month.

A report from the U.S. Commerce Department Friday showed the economy in much weaker shape than anticipated, with gross domestic product expanding at a 1.3% annual rate in the second quarter, below the 1.6% growth rate economics expected. Read more about the GDP data.

Short dollar positions were obviously set up for the GDP release and exercised instantly when the bad GDP data came out, “sending the Swiss franc into amazing new highs against the buck,” said Richard Hastings, a macro strategist at Global Hunter Securities.

“This was highly correlated to gold which enjoyed a quick bounce to the upside,” he said. “We would imagine that new bets are set up for early Monday morning’s open in Asia — all of it setting up new bearish positions for the U.S. dollar and new highs for the swiss franc and gold.” Read about the rally in gold.

Against the Swiss franc, the dollar
USDCHF, +0.4132%
fell to an all-time low again, and recently traded at 78.86 centimes, down from 80.15 centimes late Thursday. The greenback has lost over 6% month to date against the franc. There are 100 centimes in a Swiss franc.

Separately Friday, a gauge of consumer sentiment fell to 63.7 in July — the lowest level since March 2009 — from 71.5 in June, according to media reports of the gauge from Thomson Reuters/University of Michigan. Read about the consumer sentiment data.

The British pound
GBPUSD, -0.0795%
was up at $1.6427 from $1.6334 late Thursday, while the Australian dollar
AUDUSD, -0.0670%
inched up to $1.0997 from $1.0986.

Yen strength

Against the yen, the dollar
USDJPY, +1.00%
extended losses to buy as little as ¥76.93, the lowest since its nadir of ¥76.25 set on March 17.

The greenback was last at ¥77.01, down from ¥77.77 in late North American trading Thursday. The dollar trades 2% lower for the week, down over 4% from a month ago.

The dollar’s decline against the yen came after the U.S. House of Representatives’ leadership canceled a vote on a plan to lift the debt ceiling because it didn’t appear to have enough the votes to pass. Read more on debt-vote cancellation.

The outlook for the dollar is “a mess, and the markets are reflecting that fact,” said John Kicklighter, currency strategist for DailyFX.com. “Headlines between a canceled vote to another effort to push undoctored bills through Congress are playing to traders emotions – hope, fear and confusion.”

“We could easily see sharp swings to either side on EURUSD depending on the headlines generated, but we aren’t going to see any sustainable moves until there is some tangible resolution on the U.S. deficit issue,” he said. “At stake are the reserve holdings for a large segment of the investing world.”

Some strategists say that a U.S. downgrade would initially cause the greenback to rise.

“The immediate effect of the potential U.S. downgrade would be one in which risk aversion increases and liquidity decreases, both of which support” the U.S. dollar, said analysts at Barclays Capital.

“However, [given] the fact that this is a U.S.-driven risk, the [dollar] will likely lag other safe-haven currencies,” such as the yen and Swiss franc, they said.

Euro’s problems

Also Friday, the euro briefly extended a loss on the dollar after Dow Jones Newswires reported the European Financial Stability Facility, the euro zone’s sovereign rescue fund, may not be ready to deliver the next batch of loans due to Greece by mid-September.

That could force Italy and Spain to lend directly to Greece, the report said, citing unidentified euro-zone officials — even while both countries have seen borrowing costs jump sharply in recent weeks.

Earlier, Moody’s Investors Service said it put Spain’s government bond ratings on review for possible downgrade from Aa2, citing worries about continuing funding pressures on the Spanish government and concerns about the country’s fiscal-consolidation efforts.

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